In my post about Cardlytics earlier this week, I laid out the reasons for why the transaction-based marketing approach could displace, or at least severely weaken, the interchange model, which the major payments companies rely on today.
Previously, I have also covered other deal intermediaries, such as Groupon and Google, and highlighted the similar threat they pose to the interchange model. As offers are increasingly delivered on mobile devices, it will be a small matter for deal intermediaries to add a payments solution to the backend of their service, and effectively disintermediate the traditional payments networks.
As the deal intermediary business develops at lightening speed and new players surface on a daily basis, we are starting to see different business models emerge.
Below I will try to lay out five main categories that I have seen so far and try to make some sense of where the industry might be going.
Group-Based Buying
The group-based model pursued by Groupon and Living Social has seen the most traction so far. Groupon is often referred to as the fastest growing company of all time, having received a $9B buy-out offer from Google within two years of launch. It mainly offers deeply discounted deals from local service providers, such as hair dressers, restaurants and masseurs, and has proven a highly effective marketing channel for these business to attract new customers.
On the downside, their deals are not targeted or customized to potential customers beyond being in the same city. This undoubtedly leads to low conversion rates and potential Groupon fatigue, in that people don’t even read their ads. By exclusively focusing on deeply discounted deals, they also limit their offers to one-off services.
Social Group-Buying
Last week, Facebook announced a new feature called “Buy with Friends”. The feature enables users to share their purchases and “unlock” deals for other friends. Facebook has found that more than 50% of test users chose to share a purchase they made on the social network with their friends and a number of other studies show demonstrate the power of recommendations from friends to impact our purchasing behavior.
Initially, the feature is focused on purchases within the network (e.g. games and apps) and only one purchase is enough to unlock deals. However, over time, one could imagine how this feature could extend across the internet and require more than one purchase to unlock deals. For example, I could imagine going to any online store and being told that the ordinary price for a product is X, but if I buy with 5 friends, we get a 15% discount, if I buy with 10 friends, we get a 25% discount, etc.
This feature clearly has the potential to rival Groupon and could potentially transform pricing models across a range of industries.
Transaction-Based Marketing
Transaction-based marketing has been seen as Eldorado for card companies for years. However, intermediating deals is far from the core business of a credit card company, and we have not seen a successful implementation until third-party players recently entered the market.
The benefit with this model is that it provides retailers unique insight into their customers’ and prospects’ purchasing behavior and enables them to target their offers very effectively. Seeing as the reward or discount is automatically redeemed when the customers use their registered cards, they also avoid the hassle of coupons, promotion codes, etc.
A key challenge associated with transaction-based marketing is the complexity of integrating the system with banks’ technologies and implement the program. Cardlytics and similar providers also need to develop tools that effectively leverage the treasure chest of data to which they have access and enable merchants to easily and effectively target customers. Finally, they must move away from delivering offers through online bank statements, and develop more timely and convenient delivery channels.
Location-Based Marketing
Location-based services, such as Foursquare, Gowalla, Facebook Places and Scvngr, are receiving a lot of attention and seeing explosive growth. So far they have mainly encouraged ‘check-ins’ with social updates on online badges, and only sporadically offered deals.
However, the potential to for these services to offer deals is undoubtedly huge. Imagine leaving the cinema and being offered a dinner deal at a local restaurant or bar. Seeing as location-based services, by definition, are mobile, it is also easy for them to integrate with a payment interface. The benefit of doing this would be that they would have access transaction data and be able to overlay transaction-based marketing on their location-based services – powerful!
Preference Based Marketing
Earlier this week, a Seattle-based startup named Thoughtful, launched a new service that generates gift recommendations based on the recipient’s taste as indicated on their Facebook profile.
The beauty of Thoughtful’s business is that it offers uniquely customized gifts for which its customers don’t expect deep discounts. This makes it possible for a broader range of retailers to participate, in comparison with Groupon, which is primarily limited to smaller service providers that are willing to offer 50%+ discounts to get people in the door. Still, by focusing on gifts, Thoughtful’s potential in terms of total volume is of course more limited that Groupon’s.
Although a gifts-business faces some limitations, there is clearly plenty of potential to leverage the preference-based model for other opportunities – e.g. Groupon or Google could perhaps benefit from adopting this approach to better target their offer.
Final thoughts
Having reviewed five emerging models, it is clear that none of the current players have total cracked the code, and despite their staggering success, there is plenty of potential to improve even further. In addition to developing new approaches to the industry, the most obvious potential comes from developing hybrids from the already existing models.
Particularly the location-based model could be overlayed with any of the other models. Being able to deliver deals based on a customers’ location adds immediacy and should increase conversion rates. It is therefore no surprise that most of the big players, such as Facebook and Google are positioning themselves in this space.
Another interesting observation is that Facebook plays an important role in most of the models, perhaps with the exception of transaction-based marketing. As social commerce matures and is likely to make up an increasingly important piece of Facebook’s revenue stream, they are sure to be a front-runner in this space.
Still, other players such as Google, Groupon and e-Bay will undoubtedly give them fierce competition and make this industry one of the most exciting to watch over the next few years.
